At Florida Construction Law Group, we understand the importance of construction projects for families, businesses, and communities. These contracts are the backbone of projects that shape the way Florida looks, feels, and welcomes people from outside our great state.
Unfortunately, there are many hands involved in construction contracts that could lead to issues with properly completing the contract. Some of these are unintentional while others are pure negligence that can halt a good project in its tracks.
Failure to properly execute the contract could result in a construction loan foreclosure. Most people think of foreclosures in regard to homes when mortgages aren’t fulfilled, but construction loan foreclosures are quite common in the construction industry. It’s important to know the causes and consequences of any involved parties failing to do their part when a construction loan is present.
Causes of construction loan foreclosures
We previously wrote about certain situations that can result in foreclosure. This is not too dissimilar from a normal property foreclosure in that the foreclosure can result from any failure to fulfill the duties within the contract.
While mortgages have a set payment schedule, construction loans often rely on “draw requests” which means a party in the agreement can request payment once a certain benchmark is completed. In this case, borrowers don’t have access to the full funds upfront but instead get funds as needed throughout the course of the project. These draw requests are the most common cause of foreclosure.
Causes of construction loan foreclosures include:
- Failure by the construction lender to pay a proper draw request after the completion of a benchmark
- Project benchmarks aren’t reached in a timely manner (or at all) as detailed in the terms of the loan
- The borrower fails to secure the funds necessary to pay the loan
- The builder fails to sell or rent the property/project, resulting in an inability to pay off the loan
These and other conditions can result in foreclosure. If you suspect any of these conditions are present or may be possible soon, it’s important to take steps to mitigate the issue and the risk of foreclosure.
Consequences of construction loan foreclosures
A construction loan foreclosure will result in the lender seizing the property and stopping the project in its tracks. This means wherever the project is, the lender can take control and could then decide to sign with a different contractor to finish the project or sell it entirely to wash their hands of the situation (which is the most common result).
In order to do this, the lender has to provide proper notice to contractors under Florida statute 713.3471. This means there should be time and negotiation prior to any final actions that result in foreclosure. The statute exists to protect contractors who are actively and continuously working on a project from having funding pulled out from under them without due notice. When contractors receive this notice, it’s important to secure the project and halt work until the situation is resolved.Florida Construction Law Group has extensive experience in both prosecuting and defending construction loan foreclosures. Whatever side you are on the deal, we can help you sort through it. The best result is to contact us and resolve the dispute before litigation and foreclosure occur.